AVC and pension maximum lump sum

saucer

Coming back to this old thread, there is a version of the formula on here https://www.gwentpensionfund.co.uk/media/bpbn0f3f/taking-a-tax-free-cash-lump-sum-when-you-retire-factsheet.pdf
I thought earlier that it suggests maximum lump sum less than on old formula. Working it through with our figures it arrives at a very similar but not exactly the same result.  According to this:
Annual pension * 120/7 + PCLS * 10/7 + AVC * 10/7 = Total capital value

25% up to this limit can be taken tax free as far as I can see.

estorilhammy

Thank you to the board for giving me the information I required without even posting anything! However it got me to thinking so I will post a few figures and see what people think.

I have recently turned 59

I have a pension from the armed forces of approximately 17K per year

I work for the local council and due mostly to overtime became a 40% tax payer and will be sat in the 40% bracket until I retire probably in about 3 years.

No mortgage, no debt, no large outgoings.

My idea was to contribute as much as possible to my AVC in order to get the maximum tax relief and I am currently putting about 1K a month into it.

As I intend retiring early due to my job being quite physical and having the wish to travel and maybe live abroad for short periods my LGPF pension will be commuted and I can see that my AVC which would be worth approximately 50K would not all be allowed as a tax free payout under the mathematical equation given above. I don't really want a paltry income from whatever is left so I would be willing to take a 20% hit from what remains when I withdraw it (20% would be my tax band if there are no government changes to the tax bands).

But that got me thinking. If I paid everything into my AVC that would normally be taxed at the 40% rate and then emptied it at retirement (maybe retiring 1 day into the new tax year) then by paying the 20% tax rate surely I am quids in? Or am I missing something? Can I withdraw the money over more than 1 tax year or would my AVC provider force me to buy an annuity once I draw my LGPF pension? 

Sorry, I know I'm rambling and this board wasn't set up for this specific question but it does tie in nicely with what was discussed earlier.

TVM for any interest.

EH

saucer

You would be quids in. If it is an AVC that is part of LGPS (usually with Prudential)  you would be able to get full tax relief, and all of it back tax free subject to the max according to the formula above. This is also based on you taking it in full at the same point as retiring.

estorilhammy

Hi Saucer,
                 Yes you are right, I would be quids in but only up to the 25% tax free amount I can take from my pension and I think that I will overshoot that in my AVC. If I decide to throw everything into my AVC that takes me over my personal tax rate of 40%, then I will have even more in my AVC, maybe as much as 40% of my pension funds (LGPF + AVC) would be in my AVC. 

If I take all the cash out of my AVC on retirement day on the 7th April then a good portion will be tax free but I suppose the rest will be taxed at my own personal tax rate (20%) unless it takes me up above the 40% tax level. Still a good deal, 40% tax relief on the way in, some growth and then (apart from the tax free portion) taxed at 20% on the way out. 
 You are allowed to invest your whole year's wage in your AVC but I don't see how that would benefit me, 20% tax relief on the way in and 20%, possibly more on the way out if I breach my 40% personal tax allowance.

Is there anything I'm missing?

EH

saucer

estorilhammy said:

Hi Saucer,
                 Yes you are right, I would be quids in but only up to the 25% tax free amount I can take from my pension and I think that I will overshoot that in my AVC. If I decide to throw everything into my AVC that takes me over my personal tax rate of 40%, then I will have even more in my AVC, maybe as much as 40% of my pension funds (LGPF + AVC) would be in my AVC. 

If I take all the cash out of my AVC on retirement day on the 7th April then a good portion will be tax free but I suppose the rest will be taxed at my own personal tax rate (20%) unless it takes me up above the 40% tax level. Still a good deal, 40% tax relief on the way in, some growth and then (apart from the tax free portion) taxed at 20% on the way out. 
 You are allowed to invest your whole year's wage in your AVC but I don't see how that would benefit me, 20% tax relief on the way in and 20%, possibly more on the way out if I breach my 40% personal tax allowance.

Is there anything I'm missing?

EH

Have you worked through the formula? I suspect you are missing my point. If it is LGPS pension the tax free limit is very generous. All/100% of the AVC can be taken tax free. The only effective limit to this is that what you are taking (which could be 100k plus) is less than 25% of the overall capital value of the pension. Unlike DC pensions where this would be the size of a fund, the LGPS (and other public sector  DB pensions) work out capital value using the formula above. You might be surprised at the capital value of your pension if you run through the numbers, particularly given the AVC itself will be part of it.

flipper_72

Could I just ask if the calculation is made on the reduced pension amount if I choose to take the pension early?

Silvertabby

flipper_72 said:

Could I just ask if the calculation is made on the reduced pension amount if I choose to take the pension early?

Yes         .

estorilhammy

Thanks for replying again Saucer. I work out my reduced pension (reduced due to taking it early) as 8K per year. It doesn't sound a lot but I will only have worked for the council for approximately 8 years before I intend retiring). Putting that through the formula gives me a total of approximately 136K. I reckon that my AVC will be approximately 60K (call it 64K to round the numbers up. That means that I can take 50K out of my AVC completely tax free with 14K left in there. I take it I can withdraw that remaining 14K at whatever tax rate I am paying at that time?

Obviously my LGPS pension will have yearly increases before its due so more of my AVC can be paid out tax free up to the 25% figure.

Back to part of my original question, if I increase my AVC payments in order to shave anything that puts me above my 40% rate and am then taxed at 20% on anything I withdraw from my AVC over the 25% tax free when I draw my pension then I am obviously still better off.
However, if I turn greedy and put more of my wages in that is only taxed at 20% then even with the tax relief on the way in, if I am being charged 20% tax on exiting then I'm not really any better off and if I trip the 40% tax rate in the year I retire then I could have actually done myself a financial disservice?
Does everything I say make sense and am I correct?
Thanks again,
EH 
 

OldBeanz

Any money that cannot be taken tax free from the AVC can buy extra pension - at a good rate. The wife overshot and retired at 61, quite happy with her extra pension, offsetting to some degree bailing out early.

saucer

estorilhammy said:

Thanks for replying again Saucer. I work out my reduced pension (reduced due to taking it early) as 8K per year. It doesn't sound a lot but I will only have worked for the council for approximately 8 years before I intend retiring). Putting that through the formula gives me a total of approximately 136K. I reckon that my AVC will be approximately 60K (call it 64K to round the numbers up. That means that I can take 50K out of my AVC completely tax free with 14K left in there. I take it I can withdraw that remaining 14K at whatever tax rate I am paying at that time?

Obviously my LGPS pension will have yearly increases before its due so more of my AVC can be paid out tax free up to the 25% figure.

Back to part of my original question, if I increase my AVC payments in order to shave anything that puts me above my 40% rate and am then taxed at 20% on anything I withdraw from my AVC over the 25% tax free when I draw my pension then I am obviously still better off.
However, if I turn greedy and put more of my wages in that is only taxed at 20% then even with the tax relief on the way in, if I am being charged 20% tax on exiting then I'm not really any better off and if I trip the 40% tax rate in the year I retire then I could have actually done myself a financial disservice?
Does everything I say make sense and am I correct?
Thanks again,
EH 
 

I think, but I’m not 100% sure, that you need to take all of the AVC at the same time as your LGPS in order to benefit from the generous 25% tax free limit of the capital value. I wouldn’t worry about overshooting as you can use that for more pension or pay tax on a bit of it and put it in the bank (as per the previous post). 

Regarding your other (related) question, you are right:
- Basic rate relief on the way in: basic rate on the way out = you benefit from 25% tax free so better off (This equates to 6.25%)
- Higher rate in: basic rate out = even better benefit (a 42% benefit)
- Higher rate in: higher rate out = 16.7% benefit
- Basic rate in: higher out = Bad

If you’re over higher rate tax threshold in retirement year you could probably put some in a SIPP, but I don’t know if pension recycling rules could be relevant. I’d just keep an eye on the numbers (see above).

All this of course assumes the rules don’t change in the meantime, but the 25% tax free on pensions doesn’t appear to be on anyone’s hit list.